Venezuela in 1998

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After a period of recovery in 1997, the economy of Venezuela contracted during most of 1998. Gross domestic product grew by 5.1% in 1997, but it was expected to decline by 2.5% by the end of 1998. One of the main reasons for the economy’s troubles was the drop in international oil prices. As part of an agreement with Saudi Arabia and Mexico to curb oil production, Venezuela cut its output by 200,000 bbl per day, which resulted in a projected $600 million decline in revenue for the year. Venezuela’s 1998 budget, 40% of which was accounted for by oil, was originally based on a crude-oil price of $15.50 per barrel, but by late 1998 the price had fallen to less than $12 per barrel.

Another major area of the economy adversely affected by oil prices was the currency, which depreciated by 1.5% per month before stabilizing in October. Devaluation was a subject of great controversy throughout the year. In August Coordination and Planning Minister Teodoro Petkoff accused the banks of being involved in a financial conspiracy. Disip, the secret police, was instructed to investigate an alleged forged statement in a news agency wire saying that the government was about to decree a 17-20% devaluation of currency. The rumours proved false, however.

Pressure on the government to devalue the currency came from the risk-rating agency Moody’s, which lowered the country’s rating by one notch in 1998. The government immediately prepared a package aimed at reducing the $1,560,000,000 of debt-servicing obligations without borrowing from abroad. This would include $325 million in proceeds from privatizing Sidor, the state-owned steel company; $194 million from the sale of shares in the Corporación Andina de Fomento; increased contributions from Petróleos de Venezuela, the state oil company; and the reprogramming of future debt-servicing obligations, which averaged $4 billion-$5 billion per year.

The financial crisis set the scene for the legislative elections on November 8. The most popular candidate in the opinion polls was Hugo Chávez of the Patriotic Pole coalition. Chávez, a retired lieutenant colonel, was well known as the leader of an abortive military uprising in 1992. He backpedaled on his earlier nationalist and populist stance and promised "Tony Blair-style Third Way policies," which would include privatization measures. To improve his image with wealthy Venezuelans, he swapped casual clothes for a suit and necktie, and in October he invited bankers and investors to a conference to hear his ideas on reforming the constitution by means of a referendum.

This approach paid off for Chávez. In the November election his left-wing coalition won 34% of the seats in the legislature. The centre-left Democratic Action Party won 22%, and the conservative Social Christian Party won 11%.

In the election for president in December Chávez won decisively over businessman Henrique Salas Romer. The margin of victory, 56.5%-39.5%, was the largest in a Venezuelan presidential election in 40 years. Approximately 65% of the eligible voters went to the polls, a high figure for Venezuela. Chávez became the first president in 40 years who was not a member of one of the country’s dominant political parties.